IMF head sounds alarm bells over fiscal austerity

An ever-growing majority of economists, including many Nobel laureates, oppose Osborne's policies to

In his Budget speech, the Chancellor George Osborne claimed that: "Our country's fiscal plans have been strongly endorsed by the IMF, by the European Commission, by the OECD and by every reputable business body in Britain."

That was always a dangerous game to play, especially if growth started to disappoint -- which it has. He omitted to mention that an ever-growing majority of economists, including many economics Nobel laureates, oppose his policies tooth and nail.

Both the OECD and the IMF, along with NIESR and the OBR, have downgraded their forecasts for the UK economy and a number of business leaders, especially of high street firms, have expressed their concerns about lack of growth and declining consumer spending.

And now, the boss of the IMF has sounded the alarm bells.

Dominique Strauss-Kahn, managing director of the IMF, in prepared remarks for a speech at the Brookings Institution in Washington on 13 April 2011, warned against cutting budgets too far and creating long-term unemployment.

What about fiscal policy? Advanced countries need to put fiscal positions on sustainable medium-term paths, to pave the way for future growth and employment.

But fiscal tightening can lower growth in the short term and this can even increase long-term unemployment, turning a cyclical into a structural problem. The bottom line is that fiscal adjustment must be done with an eye kept keenly on growth.

The latest data for the fourth quarter of 2010 showed that growth in the UK fell by 0.5 per cent. And it took the coalition a year to prepare its feeble growth plan. The coalition is not serious about growth, as it has its eyes elsewhere.

There is a strong possibility that Strauss-Kahn will resign to run for the French presidency against Sarkozy. In any case, his term expires in June 2012.

Gordon Brown is the obvious candidate to replace him. His recent book Beyond the Crash makes the case for a global effort to solve the problems of what he calls "the first crisis of globalisation". Speaking in Washington at Georgetown University yesterday -- down the road from IMF headquarters -- Brown argued that solving pressing international problems would require a worldwide effort.

We are in a new situation. Problems that . . . are in need of global solutions cannot be solved by one country alone, or bilaterally, or even trilaterally, but can only be solved by the world coming together in co-operative action.

He is saying all the right stuff to head the IMF, a great world institution that emerged from the first Bretton Woods conference.

George Osborne is probably not going to be terribly happy about such a possibility, especially given that he seems to personally dislike Gordon a lot. If Brown were to get the job, it is pretty unlikely that he would say what a great job Osborne is doing.

It turns out that Brown has a lot of support in the US and from other countries and may actually get the post. It would be fun to watch the two of them going at it.

Osborne continues to play the political game of blaming the Labour government in general -- and the former PM in particular -- for the economic problems he inherited.

That we have been faced by a global financial crisis that started in the US housing market and spread to the UK and the rest of the world suggests that these claims are nonsense. That Brown refused to take us into the euro and set up an independent central bank were major achievements.

Let us not forget that Conservative economic policy was to match Labour's spending plans. Our current Chancellor has still not told us what actions he would have taken; presumably because he has no clue.

Would he have rescued the banks? Increased stimulus? What would he have done?

The British people are entitled to know. So if I were to get to interview George, I would ask him this simple question -- what would you have done differently in the crisis?

Interestingly, claims that all our economic problems are Labour's fault no longer seem to be resonating with the public. The latest YouGov/Sunday Times poll of 2,206 British adults conducted on 7 and 8 April 2011 asked: "Do you think the coalition government is managing the economy well or badly?" 37 per cent said well, while 53 per cent said badly and 10 per cent said they didn't know. When asked about the state of the economy, 77 per cent said it was bad; a further 62 per cent said they expected that the financial situation of their household would be worse in 12 months time.

Support for Osborne's strategy is crumbling in the country. Support is likely to fall further when the GDP numbers for the first quarter of 2011 are published on 27 April, which is likely to be well below the 0.8 per cent the OBR is forecasting.

I am expecting a number around 0.2 per cent or 0.3 per cent at best, with worse to come later in the year. Strike the IMF from the list of organisations that Osborne claims support his reckless policies.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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North Yorkshire has approved the UK’s first fracking tests in five years. What does this mean?

Is fracking the answer to the UK's energy future? Or a serious risk to the environment?

Shale gas operation has been approved in North Yorkshire, the first since a ban introduced after two minor earthquakes in 2011 were shown to be caused by fracking in the area. On Tuesday night, after two days of heated debate, North Yorkshire councillors finally granted an application to frack in the North York Moors National Park.

The vote by the Tory-dominated council was passed by seven votes to four, and sets an important precedent for the scores of other applications still awaiting decision across the country. It also gives a much-needed boost to David Cameron’s 2014 promise to “go all out for shale”. But with regional authorities pitted against local communities, and national government in dispute with global NGOs, what is the wider verdict on the industry?

What is fracking?

Fracking, or “hydraulic fracturing”, is the extraction of shale gas from deep underground. A mixture of water, sand and chemicals is pumped into the earth at such high pressure that it literally fractures the rocks and releases the gas trapped inside.

Opponents claim that the side effects include earthquakes, polluted ground water, and noise and traffic pollution. The image the industry would least like you to associate with the process is this clip of a man setting fire to a running tap, from the 2010 US documentary Gasland

Advocates dispute the above criticisms, and instead argue that shale gas extraction will create jobs, help the UK transition to a carbon-neutral world, reduce reliance on imports and boost tax revenues.

So do these claims stands up? Let’s take each in turn...

Will it create jobs? Yes, but mostly in the short-term.

Industry experts imply that job creation in the UK could reflect that seen in the US, while the medium-sized production company Cuadrilla claims that shale gas production would create 1,700 jobs in Lancashire alone.

But claims about employment may be exaggerated. A US study overseen by Penn State University showed that only one in seven of the jobs projected in an industry forecast actually materialised. In the UK, a Friends of the Earth report contends that the majority of jobs to be created by fracking in Lancashire would only be short-term – with under 200 surviving the initial construction burst.

Environmentalists, in contrast, point to evidence that green energy creates more jobs than similar-sized fossil fuel investments.  And it’s not just climate campaigners who don’t buy the employment promise. Trade union members also have their doubts. Ian Gallagher, Secretary of Blackburn and District Trade Unions Council, told Friends of the Earth that: “Investment in the areas identified by the Million Climate Jobs Campaign [...] is a far more certain way of addressing both climate change and economic growth than drilling for shale gas.”

Will it deliver cleaner energy? Not as completely as renewables would.

America’s “shale revolution” has been credited with reversing the country’s reliance on dirty coal and helping them lead the world in carbon-emissions reduction. Thanks to the relatively low carbon dioxide content of natural gas (emitting half the amount of coal to generate the same amount of electricity), fracking helped the US reduce its annual emissions of carbon dioxide by 556 million metric tons between 2007 and 2014. Banning it, advocates argue, would “immediately increase the use of coal”.

Yet a new report from the Royal Society for the Protection of Birds (previously known for its opposition to wind farm applications), has laid out a number of ways that the UK government can meet its target of 80 per cent emissions reduction by 2050 without necessarily introducing fracking and without harming the natural world. Renewable, home-produced, energy, they argue, could in theory cover the UK’s energy needs three times over. They’ve even included some handy maps:


Map of UK land available for renewable technologies. Source: RSPB’s 2050 Energy Vision.

Will it deliver secure energy? Yes, up to a point.

For energy to be “sustainable” it also has to be secure; it has to be available on demand and not threatened by international upheaval. Gas-fired “peaking” plants can be used to even-out input into the electricity grid when the sun doesn’t shine or the wind is not so blowy. The government thus claims that natural gas is an essential part of the UK’s future “energy mix”, which, if produced domestically through fracking, will also free us from reliance on imports tarnished by volatile Russian politics.

But, time is running out. Recent analysis by Carbon Brief suggests that we only have five years left of current CO2 emission levels before we blow the carbon budget and risk breaching the climate’s crucial 1.5°C tipping point. Whichever energy choices we make now need to starting brining down the carbon over-spend immediately.

Will it help stablise the wider economy? Yes, but not forever.

With so many “Yes, buts...” in the above list, you might wonder why the government is still pressing so hard for fracking’s expansion? Part of the answer may lie in their vested interest in supporting the wider industry.

Tax revenues from UK oil and gas generate a large portion of the government’s income. In 2013-14, the revenue from license fees, petroleum revenue tax, corporation tax and the supplementary charge accounted for nearly £5bn of UK exchequer receipts. The Treasury cannot afford to lose these, as evidenced in the last budget when George Osborne further subsidied North Sea oil operations through increased tax breaks.

The more that the Conservatives support the industry, the more they can tax it. In 2012 DECC said it wanted to “guarantee... every last economic drop of oil and gas is produced for the benefit of the UK”. This sentiment was repeated yesterday by energy minister Andrea Leadsom, when she welcomed the North Yorkshire decision and described fracking as a “fantastic opportunity”.

Dependence on finite domestic fuel reserves, however, is not a long-term economic solution. Not least because they will either run out or force us to exceed international emissions treaties: “Pensions already have enough stranded assets as they are,” says Danielle Pafford from 350.org.

Is it worth it? Most European countries have decided it’s not.

There is currently no commercial shale-gas drilling in Europe. Sustained protests against the industry in Romania, combined with poor exploration results, have already caused energy giant Chevron to pull out of the country. Total has also abandonned explorations in Denmark, Poland is being referred to the European Court of Justice for failing to adequately assess fracking’s impact, and, in Germany, brewers have launched special bottle-caps with the slogan “Nein! Zu Fracking” to warn against the threat to their water supply.

Back in the UK, the government's latest survey of public attitudes to fracking found that 44 per cent neither supported nor opposed the practice, but also that opinion is gradually shifting out of favour. If the government doesn't come up with arguments that hold water soon, it seems likely that the UK's fracking future could still be blasted apart.

India Bourke is the New Statesman's editorial assistant.